Throwing the startup baby out with the Hedge Fund bathwater

Your local friendly Eurocrat, in trying to nail Hedge Fund buccaneers looks like they have accidently nailed the EU VC industry - TechCrunch:

The AIDM Directive is part of wider moves by the European Commission to regulate the ‘riskier’ end of the financial system. But in seeking to impose greater transparency and accountability on hedge funds and private equity firms, like a cod trawler killing dophins, this drag net could destroy the early stage investment scene in Europe.

This is “catch-all” regulation stretches across hedge funds to venture firms, with very little consideration of how these vehicles operate. The trouble is that VC has been lumped in with things which pose a “systemic risk” to the financial system, when that’s not the case at all.

Under the proposed Directive, VCs will be required to disclose a lot more information, which is likely to cost as much as €100,000 annually per investee company. The Directive also imposes much greater capital requirements on venture firms, even as funds are shrinking to reflect the ease of creating startups now. VCs will also have to use outside depositaries (i.e. custodians) and independent valuation agents, again, adding cost and complexity.

The result is that successful start-ups from Europe like Skype, MySQL and Playfish would be less inclined to take VC money from European investors, because it will cost more.

Apparently 500-odd EU VC's have already signed up to a protest petition, but my view is that the VC industry - c 3% of the total "risky money" industry in the EU - needs to be aware that the EU have to regulate the Hedge Funds etc after The Crunch. They therefore need to make a carve-out proposal in my view.

The obvious thing is to have a materiality test - to lodge €100,000 worth of cost you need to be doing deals of €10m and above at least, so that would be a good cutoff and should cover nearly all VC activity..